Utilities benefit from AI tailwinds. Can the industry shake off its boring reputation?

There are many good reasons to invest in media. They are recession-proof. Dividends are attractive. They are adjustable and reliable.

But is the rise of artificial intelligence, which relies on the massive amounts of electricity required by data centers, now emerging as the main reason for investing in this sector?

You might come to this conclusion given the staggering growth – well, by utility company standards – that has taken place over the past three months.

U.S. utilities included in the S&P 500 index gained 15 percent during this period, by far the best-performing sector. By comparison, technology stocks have risen 8.6% in three months.

Sure, we can put all kinds of stars here. At other times, such as last year, technology stocks have easily outperformed utilities. Despite all the newfound attention, U.S. utilities are still nearly 10 percent below their 2022 highs.

The recent gains are also mysteriously absent from other regions, such as Canada. Here, utilities included in the S&P/TSX Composite Index are up less than 3 percent over the past three months.

Finally, U.S. economic activity fell to just 1.3% on an annualized basis in the first quarter, down from 3.4% in the fourth quarter of 2023. Slowing economic growth leaves defensive stocks like utilities they look relatively attractive. It may also lead to cuts in central bank interest rates, which should boost the fortunes of dividend-paying stocks.

But asterisks aside, it’s hard to ignore the impact of artificial intelligence, an investing topic that has dominated the stock market for about a year and is forcing investors to consider other potential winners beyond chipmaker Nvidia Corp. NVDA-Q

While utilities may seem complicated at first glance, the connection between artificial intelligence and electricity demand is real.

“Data centers are and will continue to be a significant source of demand,” Suparna Ray, an energy analyst at the U.S. Energy Information Administration (EIA), said in an email.

In its first-quarter financial results, American Electric Power Co. Inc. based in Ohio, saw a 10.5 percent year-over-year increase in commercial energy demand driven by data centers.

As more companies take advantage of the promise of artificial intelligence to increase productivity, the demand for electricity will grow even further. Data centers and chip factories consumed 3.5% of total U.S. electricity in 2023, according to Rystad Energy, a global research and analytics firm.

However, Rystad expects this share to grow at a compound annual growth rate of 13 percent through 2030, requiring significant investment in the U.S. power grid.

“The U.S. grid is in dire need of modernization and new investment to meet growing demand for electricity,” Mohammed Hamdaoui, vice president of energy markets research at Rystad, said in an email.

It’s hard to imagine a better long-term scenario for utility stocks. But there may be some bumps along the way.

To start with, not all utility stocks are likely to live up to lofty expectations. While the U.S. sector as a whole has been strong over the past few months, there are discrepancies between individual names within the sector.

One clear winner is Vistra Corp. Texas-based VST-N with nuclear, solar and battery storage capabilities. The company’s share price has surged 91 percent over the past three months, partly on optimistic data center expectations. In early May, the company’s shares joined the S&P 500 index.

However, other tools are squirmy. Although Dominion Energy Inc. While DN expects energy demand from Virginia data centers to grow more than 10 percent annually over the next 15 years, the company’s stock price is down 38 percent from its recent highs in 2022. This suggests that the dampening effect of high interest rates may outpace AI hopes.

Second, the expansion of data centers may conflict with energy-saving goals related to combating climate change. This could lead to a regulatory backlash, or perhaps something that momentum-chasing investors aren’t counting on: energy-saving technology and greater efficiency – for example, through improved cooling systems and shifting computing tasks to off-peak hours.

The big hope for investors is that U.S. electricity consumption will experience another surge similar to that which began after 1950.

However, investors who prefer their utilities to be boring and predictable should also take this into account: Although electricity consumption has increased 14-fold over the past seven decades, according to the EIA, it has remained essentially unchanged since 2007 thanks to a large increase in efficiency standards .

The promise of artificial intelligence is tempting. But perhaps boring stability, rather than exciting growth, is still what makes utilities attractive in the long term.